Case No. 11-22100
Honorable Daniel S. Opperman
OPINION REGARDING TRUSTEE'S APPLICATION TO SETTLE
ADVERSARY PROCEEDING NO. 11-2151
This matter is before the Court on the Motion of the Chapter 7 Trustee, Daniel C. Himmelspach, to settle certain claims the estate has against Ruthanne Larry.
The instant proposed settlement is the result of negotiations between the Trustee and Ms. Larry. On May 1, 2013, the Chapter 7 Trustee filed a Third-Party Complaint against Ms. Larry asserting various counts, including: conversion; fraudulent misrepresentation; breach of fiduciary duty; avoidance actions under 11 U.S.C. §§ 544 and applicable Michigan law, 547, 548, 550, 551; lien avoidance, unjust enrichment and/or construction trust, and claim disallowance. These counts arise from allegations that Ms. Larry, constructively or otherwise, fraudulently received certain insurance policy proceeds and other funds from the Debtor without properly compensating Debtor for such at a time when Debtor was insolvent, and that a lien granted to Ms. Larry is avoidable due to improper perfection of lien (the "Trustee Claims"). Ms. Larry has asserted defenses to the Trustee Claims, including, but not limited to: the value given by Ms. Larry to Debtor exceeded that which she received from any transfers; no fraudulent intent on Ms. Larry's part existed at any relevant time; and Debtor was not insolvent or became insolvent as the result of any transfers.
The relevant terms and context of the proposed settlement are as follows:
1. The claim filed by Ms. Larry as a secured claim of $323,772.65 shall be treated as an unsecured claim.
2. Ms. Larry shall pay the estate the sum of $30,000.00 within five business days of an order approving the settlement.
3. The Trustee agrees to release the Trustee Claims against Ms. Larry in Adversary Proceeding 11-2151.
4. The proposed settlement does not impact any claim Gretchen Carter, in her capacity as Trustee and a creditor in this case, may have against Ms. Larry regarding her claim objection currently pending in this bankruptcy case or otherwise. Also, the proposed settlement does not impact the claims made by Ms. Carter against Ms. Larry.
Gretchen Carter, Successor Trustee of the Virginia Larry Trust Dated October 2, 1981, and Gretchen Carter, Successor Trustee of the Warren Larry Trust dated October 2, 1981.
At the January 24, 2014, hearing on the Motion, the Trustee characterizes the net benefit to the estate from this settlement to be $183,000.00, which does not include costs saved by avoidance of future litigation. The $183,000.00 amount is calculated by adding the $30,000.00 to be paid by Ms. Larry to $153,000.00, which is the value of Debtor's assets, upon which Ms. Larry had asserted a secured claim, but has now agreed to forego.
Ms. Carter objects to the proposed settlement, asserting that the proposed settlement is not reasonable because the Trustee is likely to prevail on the Trustee claims, which will provide a 100 percent recovery to all creditors in this case. Ms. Carter's claim comprises approximately 98 percent of the unsecured claims in this case. Ms. Carter asserts that the consideration to be received by the estate is inadequate and unreasonable.
Ms. Larry filed a concurrence in support of the Trustee's Motion.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(a). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) (matters concerning the administration of the estate) and § 157 (b)(2)(B) (allowance or disallowance of claims against the estate).
A. Bankruptcy Claims Analysis
Rule 3001(f) states:
(f) Evidentiary Effect. A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.
The claim must still set forth facts necessary to support the claim and be in the proper form. Fed. R. Bankr. P. 3001(a). A noted bankruptcy treatise, Collier on Bankruptcy, states that the "proof of claim must be in writing; set forth the creditor's claim; be executed by the creditor or an authorized agent; attach writings on which a claim, or an interest in the debtor's property that secures the claim, is based; and attach documents evidencing perfection of any security interest.". Collier on Bankruptcy, ¶ 3001.09 (Alan N. Resnick & Henry J. Sommer eds.,16th ed. 2010).
The objecting party to the claim has the burden of going forward and of introducing evidence sufficient to rebut the presumption of validity. The objection must have probative force equal to the contents of the claim. In re Unimet Corp., 74 B.R. 156 (Bankr. N.D. Ohio 1987). The objecting party's burden is by a preponderance of the evidence. In re Fidelity Holding Co., Ltd., 837 F.2d 696 (5th Cir. 1988). More than a mere unsubstantiated objection to form is required. Garner v. Shier (In re Garner), 246 B.R. 617, 623 (9th B.A.P. Cir. 2000). If the objecting party produces evidence to refute at least one of the allegations essential to the legal sufficiency of the claim, the burden of persuasion shifts back to the claimant. In re Hughes, 313 B.R. 205 (Bankr. E.D. Mich. 2004).
B. Trustee's Power to Avoid Certain Transfers and Pursue Claims
Pursuant to 11 U.S.C. § 704(a)(1), a trustee has a duty to:
collect and reduce to money the property of the estate for which the trustee serves, and close such estate as expeditiously as is compatible with the best interests of parties in interest.
11 U.S.C. §§ 541 and 542 provide that property of the estate includes all legal and equitable interests of a debtor, and that all such property of the estate shall be turned over to the trustee. Thus, a trustee has a duty to pursue all property of the estate.
As a representative of the estate, the trustee has the "capacity to sue and be sued." 11 U.S.C. § 323(b). Further, a trustee may take action to recover certain transfers that are avoidable under the Bankruptcy Code or state law. Pursuant to 11 U.S.C. § 550, a trustee may avoid certain transfers under 11 U.S.C. §§ 544, 545, 547, 548, 549, 553(b), or 724(b), for the benefit of the bankruptcy estate. Section 544 allows a trustee to avoid certain transfers under state law. "The 'strong arm' clause of the Bankruptcy Code, 11 U.S.C. § 544(a), grants a bankruptcy trustee the power to avoid transfers of property that would be avoidable by certain hypothetical parties." Simon v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1023 (6th Cir. 2001). This section "allows the trustee to step into the shoes of a creditor in order to nullify transfers voidable under state [law] for the benefit of all creditors." Corzin v. Fordu (In re Fordu), 201 F.3d 693, 697 n.3 (6th Cir. 1999) (quotation marks and citation omitted). Under § 544(a)(1), "the trustee by law acquires all the rights under state law of a hypothetical creditor with a lien on all the property of the debtor . . . ." LSA Leasing Corp. v. Phipps Constr. Co., 972 F.2d 347 (Table), 1992 WL 172131, at *3 (6th Cir. July 22, 1992).
C. Motions to Compromise
The law favors compromise, but any proposed compromise or settlement must be in the best interests of the estate. "In considering a proposed compromise, the bankruptcy court is charged with an affirmative obligation to apprise itself of the underlying facts and to make an independent judgment as to whether the compromise is fair and equitable. The court is not permitted to act as a mere rubber stamp or to rely on the trustee's word that the compromise is 'reasonable.'" Reynolds v. Commissioner of Internal Revenue, 861 F.2d 469, 473 (6th Cir. 1988).
The purpose of compromise agreements "is to allow the trustee and the creditors to avoid the expenses and burdens associated with litigating sharply contested and dubious claims." Bard v. Sicherman (In re Bard), 2002 WL 31371984, at *2 (6th Cir. Oct. 15, 2002) (quoting In re A & C Properties, 784 F.2d 1377, 1380-81 (9th Cir. 1986)).
A bankruptcy court should "form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise." TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968).
Courts have used the following factors: (1) the probability of success in the litigation; (2) the difficulties, if any, to be encountered in the matter of collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; and (4) the paramount interest of the creditors and a proper deference to their reasonable views in the premises. Bauer v. Commerce Union Bank, 859 F.2d 438, 441 (6th Cir. 1988); Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1929); In re Dow Corning Corp., 198 B.R. 214, 221-22 (Bankr. E.D. Mich. 1996).
Analysis and Conclusion
The Court first addresses what is not involved in this proposed settlement. Neither the objection of Ms. Carter to the proof of claim of Ms. Larry or Ms. Carter's claim against Ms. Larry is part of the proposed settlement. The claim of Ms. Larry is currently disputed by Ms. Carter. That claim objection is not impacted by this proposed settlement. Such was agreed to on the record by counsel for Ms. Larry, the Trustee and Ms. Carter at hearings on December 6, 2013, and January 24, 2014. Further, this Court's January 28, 2014, Order Resolving Motion for Order Consolidating Claim Objection with Adversary Proceeding entered upon stipulation of all three parties, confirms such. While Ms. Carter disputes this $323,772.65 secured claim, asserting lack of consideration or grossly inadequate consideration, Ms. Larry's claim still stands as valid claim on its face for purposes of the proposed settlement. The proposed settlement transforms this claim from secured to a general unsecured claim, thereby giving Ms. Larry a pro rata distribution along with other general unsecured creditors, the majority of which creditor body is comprised of Ms. Carter. While the claim objection is not brought by the estate, the estate is directly impacted by it and asserted its own claim disallowance count in the Third-Party Complaint. Likewise, Ms. Carter's claims in the Adversary Proceeding remain unaffected by the proposed settlement.
Turning to what the Trustee proposes to settle, the avoidance of certain transfers and other causes of action the Trustee has asserted against Ms. Larry, all four factors weigh in favor of the Trustee as to this aspect of the proposed settlement. In regard to the first element, as detailed by the Trustee at oral argument on January 24, 2014, the Trustee's position as to claims regarding the insurance proceeds, the promissory note and the lien avoidance claims have significantly weakened since commencement of his Third-Party Complaint against Ms. Larry, and certain defenses and set offs have come to light through recent investigation by the Trustee. Specifically, at the January 24, 2014, hearing, the Trustee stated that the allegations that the insurance policies at issue should have been an asset of the Debtor have been weakened through discovery, including deposition testimony of Debtor's insurance agent and accountant at the time. These witnesses testified that the insurance policies and proceeds therefrom were personal in nature and not owned by the Debtor. Moreover, the Trustee cannot find an expert witness to testify in support of the Trustee's allegations. Finally, the Court concludes that the case of Jansen v. Tyler, 49 P.2d 372 (Or. 1935), is not binding and not applicable to the facts of this case for purposes of this motion.
As to asserted fraudulent transfers, the Trustee has discovered that Ms. Larry has viable defenses that these payments were for wages earned by Ms. Larry for work performed for the Debtor and, thus, reasonably equivalent value may have been received by Debtor. Further, Ms. Larry has offered expert testimony to the Trustee that Debtor was solvent at the time of the transfers, which is further supported by the corporate minutes as well. Also, as to the Trustee's potential lien avoidance count alleging improper perfection due to an improper signature, Ms. Larry has a strong argument that the Debtor properly signed the loan documents and that Ms. Larry may have loaned significant sums to the Debtor, both of which warrant the filing of the financing statement filed by Ms. Larry. Moreover, the issue of whether Ms. Larry's stock interest in True Value is properly perfected also is replete with issues that would have to be litigated. The Court is satisfied the Trustee has fully evaluated these defenses and that sufficient information has been provided to the Trustee to allow him to conclude that his ability to succeed in these causes of action has weakened. Thus, the Court concludes that factor one, the probability of success by the Trustee, weighs in favor of the Trustee.
As to the second element, at the beginning of the January 24, 2014, hearing, Ms. Larry's counsel conceded collectibility problems exist, and counsel for the Trustee later stated that the Trustee had evaluated his ability to collect from Ms. Larry, and concluded that collection would be problematic. Thus, the Trustee has agreed to be paid $30,000.00 by Ms. Larry in satisfaction of the Trustee Claims, claims which the Trustee now believes may potentially yield a zero return for the estate.
As detailed on January 24, 2014, Ms. Larry received $480,000.00 from life insurance policies in 2007. At least $100,000.00 has been spent on attorney fees by Ms. Larry in connection with litigation with Ms. Carter. Additional monies were infused into the Debtor by Ms. Larry until this Court converted the Chapter 11 proceeding to Chapter 7. Over the last few years, Ms. Larry has been unemployed and has lived on retirement funds and the remaining money left from the insurance policies.
The Court accepts the $480,000.00 amount stated by counsel on January 24, 2014, as the net amount of life insurance proceeds. Ms. Carter in her Brief in Support of Objections states the amount as $702,927.76. A close review of Exhibits 10 and 11 of her Brief, however, shows that $222,303.00 of that amount was paid directly to Commercial Bank and thus was not received by Ms. Larry.
Starting with a base amount of $480,000.00, after deducting $100,000.00 for attorney fees and $30,000.00 for the settlement amount, $350,000.00 remains. If spread over the period of 2007 - 2014, or 7 years, $50,000.00 would be spent every year by Ms. Larry. This is not an exorbitant amount, and the Court doubts Ms. Larry has spent all this money, but the Court has also not taken into account the amounts placed by Ms. Larry in the Debtor. With this record, the Court has no basis to question the Trustee's assessment of the collectibility of a judgment against Ms. Larry. Even taking into account other funds Ms. Larry has received, there is no evidence she could pay all the sums the Trustee seeks from her.
The Court concludes that factor two, the difficulty in collection weighs in favor of the Trustee as well. The Trustee has concluded, in his business judgment, that problems exist in collecting on a judgment from Ms. Larry. Ms. Larry has conceded such. There is nothing in the record to substantiate Ms. Carter's assertion that Ms. Larry is collectable for the claims asserted in the Third-Party Complaint.
Factor three, the complexity, costs and delay associated with continued litigation clearly weighs in favor of the Trustee. First, the claims and issues here are moderately complex, involving avoidable transfers, insurance, and solvency questions. Second, as detailed by the Trustee, the costs associated with prosecuting the Trustee's claims, including the experts, especially in the insurance area, are substantial. As admitted by Trustee's counsel, the requisite expert for the insurance aspects of the Trustee's claim has not yet been retained, mainly because the Trustee cannot find anyone to give the opinion needed to support the Trustee's claim. The search for, retention of, and testimony by such an expert will be expensive. The costs of addressing the defenses raised by Ms. Larry, which include financial experts to address solvency issues, are likewise substantial. If allowed to continue, all the costs of litigation, attorneys and experts combined, could exceed the maximum return, irrespective of any collectibility concerns. Moreover, the need to retain experts, complete discovery, and then prepare for trial will cause additional delay. This delay is another factor, when added to the complexity and costs of the litigation, that weighs in favor of the Trustee.
As to factor four, protecting the interests of creditors, the Court notes that Ms. Carter holds the largest claim. She is not, however, the only claimant. This settlement also benefits creditors of this estate because it puts an end to the potential for continued time and cost of what appears to this Court to be the major remaining issue in the Trustee's winding up of his administration of this bankruptcy estate.
Further, the Court notes that this settlement does not impact or eliminate any claims Ms. Carter may have against Ms. Larry individually. Ms. Carter's pending objection to the claim of Ms. Larry may still be prosecuted. In that claim objection, Ms. Carter seeks complete disallowance of Ms. Larry's claim. Additionally, further issues between these two individuals are preserved for decision and resolution, possibly outside the bankruptcy forum. While the Court need not consider the impact upon any one particular creditor when deciding whether a proposed compromise is fair and equitable, this fact weighs heavily in favor of the Trustee as to the fourth factor the Court is to consider-the paramount interest of the creditors.
The Court concludes that the factors weigh in favor of settlement as proposed by the Trustee as it is most efficient to creditors to resolve these issues now, without the uncertainties of litigation on these issues, as well as the attendant delay and expense. The Trustee has exercised sound discretion in settlement of the estate's interest, while at the same time not foreclosing rights asserted by Ms. Carter, the largest unsecured creditor in this case.
If that creditor wishes to take further action, she can, but not at the expense of others. By removing outside parties, such as the Trustee and other creditors, the remaining issues are left where they should be. The Court has noted that Ms. Carter has been offered the opportunity to tender more money to the estate to assert these claims, but has refrained to do so. Instead, Ms. Carter has requested this Court to substitute her counsel for the Trustee. While generous, Ms. Carter asks others to risk payment at a much later date, if at all. With this record, the Court will not impose that risk on others.
The Court has also considered the arguments of Ms. Carter and applied those arguments to the objection of Ms. Carter to Ms. Larry's claim. If Ms. Carter is successful as to her objection, Ms. Larry's claim will be disallowed completely. As a result, Ms. Carter's claim of $210,466.45, along with the remaining claims, will have the $183,000.00 amount, less administrative expenses, available. If this Court denies the Trustee's motion and allows the case to continue, the administrative expenses will increase, the $30,000.00 will not be available, and payment to claimants delayed for possibly years. The better course, in this Court's view, is to approve the Trustee's settlement and then let the remaining objections and claims proceed.
Ms. Carter urges this Court to apply a higher standard to this proposed settlement and investigate every defense of Ms. Larry the Trustee has indicated likely exist, but this Court is not required to go that far in its analysis. Even if the Court were to do so, the Court concludes that its analysis would not change. The lack of likelihood of success, the problems of collectibility, and complexity of the litigation and its attendant costs, all compel the Court to grant the Trustee's Motion. Based upon the foregoing findings, the Court concludes that the Trustee's Motion for Authority to Settle Adversary Proceeding 11-2151 should be granted, and the Trustee shall be allowed to compromise the claim of Ms. Larry and the estate's potential actions against Ms. Larry, subject to the terms and conditions stated in the Motion and the Settlement Agreement and Mutual Release attached thereto.
Counsel for the Trustee is directed to prepare and submit an appropriate Order.
Not for Publication
Daniel S. Opperman
United States Bankruptcy Judge